The Bank of England has decided to raise interest rates by a quarter point to 5.75%.

The decision to increase the cost of borrowing had been widely expected, given the current strong growth of the UK economy.

Although the rise was met with disapproval by many businesses and union leaders, there was some relief that it had not been larger.

The decision means higher borrowing costs for homebuyers and businesses, but also higher income for savers.

Although the UK economy is relatively free from inflation at the moment, members of the Bank of England's Monetary Policy Committee (MPC) have been concerned about rising housing prices, consumer spending and wages.

It fears that if the economy is left to grow unchecked, higher inflation will follow.

Stronger pound

The MPC said it had raised rates for the third time in five months because the outlook for growth in the UK and the world economy had strengthened.

"Prospective growth in domestic demand remains strong - increases in wealth, labour income and household borrowing all suggest that consumer spending will continue to grow robustly," it said.

The MPC's role is to set interest rates at a level which keeps inflation as close as possible to 2.5%.

Inflation currently stands at 2.2% but the process is complicated by the assumption that interest rates take about two years to have an effect.

In simple terms, the committee raises interest rates if it believes it needs to reduce inflation.

Reacting to the decision, Dr Ian Peters, deputy director general of the British Chambers of Commerce (BCC) said: ''This is a disappointing blow for British business.

"With the strong pound and fierce competition keeping prices firmly in check, the Monetary Policy Committee could well afford to have left rates on hold.

"Our main concern is the impact that this rise will have on exporters struggling with an already over-valued pound."

Wages pressures

The Bank of England raised rates twice towards the end of 1999 by a quarter of a point in what it described as pre-emptive steps to cool the economy.

But the latest figures have shown that consumer spending raced ahead in December and that the housing market picked up speed after the two rises.

Unemployment is also at its lowest level for nearly two decades, which is seen as leading to increased wages as employers aim to recruit and retain workers.

Union leaders attacked the interest rate rise, warning that firms will find it more difficult to expand and export.

Roger Lyons, general secretary of the Manufacturing Science and Finance union, said: "This is a disaster for manufacturing, particularly for jobs in the North."

Engineering Employers' Federation director-general Martin Temple said: "Whilst we support the MPC's aim of managing the economy in the longer term, it is too quick to react to short term data, inducing industry to manage in the short term."

TUC general secretary John Monks said the Bank had reacted too soon. "The inflation target is not under threat but manufacturing jobs are. Industry and home owners are paying the price for a South East property boom fuelled by excessive city bonuses."

But Ruth Lea, head of policy at the Institute of Directors, agreed with the decision: "We accept that such a move was probably necessary to curb any inflationary pressures building up in the economy."